Question

Your preference is represented by the utility function:

u(x₁, x₂) = x₁^0.5x₂^0.5

where x₁ is potato chips (in bags) and x₂ is chocolate bars.

The price of a bag of potato chips is $5 and the price of a chocolate bar is $10.

(a)Write down another utility function that represents the same preference as u does.

(B)Does it make sense to measure welfare or deadweight loss in terms of utilities? Explain.

Answer 1

A) U=x1^0.5*x2^0.5

MRS=MUx1/MUx2=[(0.5x2^0.5)/x1^0.5]/[(0.5x1^0.5)/x2^0.5]=x2/x1

Another utility function with same preference or MRS

U=x1^2*x2^2

MRS=[(2*x1*x2^2)]/[2*x2*x,1^2]=x2/x1

B) Utility is a term that is related to consumption decision.The welfare of CONSUMERs are measured in terms of utility,the higher the utility,the higher will be welfare of consumer.

So welfare loss or deadweight loss also can be measured in terms of utility as loss of utility .